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The role of a stock exchange

A stock exchange allows companies to raise funds by providing them with access to a pool of private and institutional investors.

An exchange’s role in financial markets is pivotal for the development of the financial industry.

An Exchange:

1. Brings companies and investors together.

An exchange allows financial intermediaries to distribute company shares, bonds or financial products to retail and institutional investors through its trading system or platform connection with brokerage firms and banks.

2. Enables issuers (ie companies) to raise new capital.

Companies have many options to raise capital. For example:

Self financing
- generation of one’s own capital from one’s own income, instead of acquiring it from external resources

Bank loans
- are the most “traditional financial resources and are normally used to finance smaller projects. For example, supermarkets use generated cash flows for self financing as they pay creditors 2 months in arrears.

Fund raising options such as Private Equity and IPOs are used to finance extraordinary events such as mergers and acquisitions to support companies during their growth phase.

3. Facilitates the process of investors subscribing in shares (securities)

Investors access the trading platforms and invest in a company's shares.

4. Provides capital to companies and investors

To allow a company to be listed, Exchanges require that the company meets its eligibility criteria and “substantial” financial and strategic standards.

Eligibility criteria normally depend on the segment and the market which companies have access to. They are normally linked to a company’s balance sheet certification, to its governance, capitalisation and free float.

Substantial financial and strategic standards become even more important, during the company’s admission phase to a specific market. The following company values are some examples of substantial requisites:

Drive towards value creation

Clear strategy, reported in the business plan

Good competitive positioning

Balanced financial structure

Management autonomy

Growing profitability

Good internal organisation

It is critical for those companies who want to list on an exchange to achieve both formal and substantial requisites formal requisites alone will not lead to strong interest from the market.